Limitation in the value of Teh and Quek’s shareholding

TAN Sri Teh Hong Piow and Tan Sri Quek Leng Chan, the owners of two Chinese banks are multi-billionaires.

Teh has a 23.4% stake in Public Bank Bhd and 44.2% in insurance company, LPI Capital Bhd. Teh’s interest in Public Bank is worth RM18.6bil, which puts him among the top three richest persons in the country.

Quek has a web of companies in Malaysia and Hong Kong with interest ranging from banks to manufacturing and property development.

His flagship company is in financial services, namely Hong Leong Financial Group (HLFG), which in turn is controlled by Hong Leong Company (M) Sdn Bhd. Quek owns 49% of Hong Leong Company that holds 52% in HLFG.

Teh and Quek hold substantial stakes in their banks, giving them the edge that make them strategic shareholders in case of any corporate exercises.

However, going forward, there are questions as to how the tycoons are going to monetise their stakes. Are their holdings really worth as much as what the market perceives them to be, considering the controlled environment that the banks operate under?

Banks are not ordinary entities where strategic stakes can be sold to those offering the best price. They operate in a regulated environment. Bank Negara wields clout over who gets to sit on the boards of banks and determines who can own substantial stakes in them

For instance, Bank Negara has made it clear that private equity funds cannot be large shareholders of banks. This is believed to have come about after Hong Kong-based fund Primus Pacific Partners became the single largest shareholder in EON Bank in early 2007. That bank had been subsequently absorbed by Hong Leong Bank.

More recently, US-based private equity firm TPG Newbridge was reported to be courting Tan Sri Azman Hashim to jointly take over AmBank Group following the announcement by Australia New Zealand Bank that it wanted to sell its stake in the banking group.

However, it is believed that Bank Negara did not approve of TPG emerging as substantial shareholder of the bank.

So far, it seems that only foreign banks are being allowed to take up a strategic stakes of more than 10% in local banks.

The regulations are that individuals can hold up to 5% while the limit is up to 10% for institutions. Anything above that threshold would require the greenlight of Bank Negara.

These restrictions, however, dampen the value of large stakes held in banks by institutions or individuals. This is simply because owners are limited in their selection of buyers for their stakes.

Teh has a 23.4% stake in Public while Quek’s indirect interest of 62% in Hong Leong Bank is though HLFG. Any change in the ownership of these blocks of shares would require the approval of the central bank. One possible way out is to break up the blocks and hive them off piecemeal. However it is the whole block that would command a premium price.

This is what happened to Langkah Bahagia Sdn Bhd, the private company that used to be the controlling shareholder of Alliance Financial Group Bhd. Langkah Bahagia had a 51% stake in Vertical Theme Sdn Bhd that held 29.06% in Alliance Financial Group.

Langkah Bahagia’s 51% interest gave it an effective 14.8% stake in the banking group. In April last year, the 14.8% block of shares was broken up in portions of less than 5% and sold to three individuals, hence circumventing the need to get Bank Negara approval.

It was a deal that was done without much fanfare. Valuations of the sale are not known. The proceeds that Langkah Bahagia – a company that used to be owned by former Finance Minister Tun Daim Zainuddin until 1998 when he sold it to his associates – received has not been disclosed.

Many doubt Langah Bahagia fetched a premium for the block of shares.

In the case of Teh and Quek, their blocks of shares are simply too big to be broken up. And there are not many buyers who can afford to fork out such large sums for a stake in the bank.

Teh’s 23.4% in Public Bank is worth close to RM18.6bil. The bank is trading at 2.23 times its book value compared with the industry norm of less than 1.4 times. Would anybody offer to buy at such valuation?

Quek’s Hong Leong Bank fetches a market capitalisation of close to RM32bil. His indirect holding in the bank through several companies comes up to 62%. His effective interest is estimated at 32%, worth some RM10.24bil.

Hong Leong Bank is trading at price to book valuation of 1.54 times and remains very much a profitable bank focused on niche segments. Ordinarily, it would be an attractive target.

But would anyone want to pay a premium for a large block of shares in a bank operating in a restrictive environment as far as shareholding changes are concerned?

And there is no certainty that Teh and Quek will be able to transfer their controlling stakes in these banks to their beneficiaries.

Teh and Quek fall under the “grandfather” rule where they are allowed to hold more than 20% in their respective banks. However there is no certainty this rule will be extended to their children.

And in Teh’s case, there is no certainty that this block of shares can be moved into a trust because Bank Negara needs to give its consent.

Business moguls tend to restructure their shareholdings when they are in their 70s or 80s. Li ka-shing and Rupert Murdock are examples of this trend.

However in banking, it is not necessarily a good idea to continue holding large shareholdings because it is never an easy feat to find buyers when the time comes to sell.

In 2006, the family members of the late Khoo Teck Puat sold their 11.5% stake in Standard Chartered Bank to Temasek Holdings for £2.3bil (about RM15bil then). The sale came two years after the death of Khoo and it was reported that there was no premium paid despite the block of shares being the single largest holding in the financial institution that always had an international presence.

Standard Chartered is based in London and it operates in a free market. There are no restrictions on buyers for the block of shares. And even in that instance, the Khoo family’s block of shares failed to fetch a premium.

Taking cognisance of what happened to the Khoo family’s block in Standard Chartered, what does that say for individuals holding large blocks of shares in banks operating in Malaysia, where the regulatory environment is restrictive as far as changes in shareholding is concerned?

Hence the current market value does not necessarily reflect the value at which the shares may eventually transact at.

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